Year-End Tax Tips for Small Businesses

There’s still time before the end of this year to execute a few strategies to reduce your 2021 tax liability. Here are a few ideas:

Take advantage of bonus depreciation. If you purchase new or used equipment, machinery, or office equipment before December 31, 100% of the cost can be deducted as bonus depreciation.

Qualified business improvements placed in service after December 31, 2017 are also eligible for bonus depreciation. “Qualified improvement property” includes many types of improvements made to nonresidential buildings after the buildings are placed in service.

So what’s the difference between bonus depreciation and Section 179 depreciation? Because bonus depreciation is unlimited – even in excess of your business’ income for the year – it reduces the situations in which you might want to expense an asset using Section 179. Consult your tax professional for what works best for your company’s situation.

Utilize bonus depreciation for heavy vehicle purchases. If you purchase an SUV, pickup or van with a manufacturer’s gross vehicle weight rating above 6,000 pounds, you can use bonus depreciation if you place it in service before the end of the year. These vehicles are classified as “transportation equipment” for federal income tax purposes. Check the vehicle’s weight by looking at the manufacturer’s label, usually on the inside driver’s side door.

Consider the timing of purchases. Want to claim 2022 expenses in 2021? If your business is run on a cash basis, credit card purchases are considered the same as cash for tax purposes. So you can make credit card purchases before the end of the year, claim the deduction for this year, and then pay the bill next year. This works well for expenses you would normally pay early in the year.

Conversely, if you want to defer some of this year’s income into next year, wait until late in 2021 to send out bills to your customers (assuming you’re pretty sure they’ll pay!). In the same way, businesses on an accrual basis can delay delivery of goods and services until next year.

Do what makes sense for you. These tips are for your consideration but may not be best for your business. So be sure to visit with your tax advisor to determine what makes sense for you!